Glossary

Loan terms, in plain English

59 words lenders use, explained without the jargon, with links to the guides that go deeper.

A

Adverse action notice

The notice a lender must give when it denies credit or offers worse terms based on your application, explaining the reasons or how to ask for them, and, if a credit report was used, how to get a free copy.

Amortization

Paying off a loan in regular installments that cover both interest and principal. Early payments are mostly interest; later ones are mostly principal, because interest is charged on a shrinking balance.

B

Balance transfer

Moving a credit card balance to another card, often with a low or 0% introductory rate and a transfer fee. Any balance left when the promotion ends is charged the regular rate.

Balloon payment

A large final payment due at the end of a loan after smaller regular payments. It can be hard to afford and may push borrowers into refinancing.

Break-even point

How long it takes for the monthly savings from refinancing to add up to the fees you paid to refinance. After that point, the new loan is ahead.

C

Cash-out refinance

Replacing your mortgage with a larger one and taking the difference in cash. It resets the mortgage's rate and term and has closing costs.

Charge-off

When a lender writes off a debt as unlikely to be collected, usually after months of missed payments. You still owe the debt, and it can be sold to a collector.

Co-borrower

A second applicant who shares ownership of the loan and responsibility for repaying it. Lenders usually consider both applicants' income and credit.

Collateral

Property you pledge to secure a loan, which the lender can take if you default. Common examples are a vehicle title, a savings account or certificate, and home equity.

Collections

When an unpaid debt is passed to a collection department or sold to a debt collector. Collection accounts can appear on credit reports.

Cosigner

A person who signs a loan and agrees to repay it if the borrower doesn't. The cosigner is fully responsible for the debt, and missed payments can appear on their credit report too.

Credit counseling

Help from an agency, often a nonprofit, to review your budget and debts and discuss options. Counseling may lead to a debt management plan but doesn't have to.

Credit report

A record of your credit accounts, payment history, balances, inquiries and some public records, kept by credit bureaus. You can get free reports from each national bureau through AnnualCreditReport.com.

Credit score

A number, commonly from 300 to 850, that summarizes the information in a credit report to predict how likely you are to repay. There are many scoring models, so your score can differ depending on which one a lender uses.

Credit utilization

How much of your available revolving credit you're using, as a percentage. Lower utilization generally helps credit scores.

D

Debt consolidation

Combining several debts into one, usually with a new loan or a balance transfer card. It saves money only if the total cost, including fees and time, is lower than what you'd pay on the original debts.

Debt management plan

A repayment plan set up through a credit counseling agency, which may negotiate lower interest rates or fees with your creditors. You make one payment to the agency, which pays the creditors.

Debt settlement

Negotiating with creditors to accept less than the full amount owed, often through a for-profit company. It can hurt credit, may create taxable income, and isn't guaranteed to work.

Debt-to-income ratio (DTI)

Your monthly debt payments divided by your gross monthly income, as a percentage. Lenders use it to judge whether you can take on another payment. Each lender sets its own limits; there is no universal cutoff.

Default

Failing to repay as the loan agreement requires. Consequences can include fees, collection, repossession of collateral, damage to credit, and a lawsuit.

E

Equal Credit Opportunity Act (ECOA)

The federal law that bars lenders from discriminating based on race, color, religion, national origin, sex, marital status, age, or because you receive public assistance, and requires notice when credit is denied.

F

Fair Credit Reporting Act (FCRA)

The federal law that governs credit reports: who can see them, how errors are disputed, and what you're told when a report is used against you.

Finance charge

The dollar cost of credit on a Truth in Lending disclosure: interest plus fees required to get the loan.

Fixed rate

An interest rate that stays the same for the life of the loan, so the payment doesn't change. Most personal loans and auto loans are fixed-rate.

G

Grace period

A stretch of time after the due date when a payment can still arrive without a late fee. Not every loan has one; the agreement says.

H

Hard inquiry

A credit check made when you apply for credit. It appears on your credit report and can lower a credit score slightly for a while.

Hardship program

A lender's or creditor's temporary arrangement for borrowers in difficulty, such as a lower payment, a deferral or a waived fee. Terms vary, and you usually have to ask.

Home equity line of credit (HELOC)

A revolving line of credit secured by your home, usually with a variable rate. You can lose your home if you can't repay.

Home equity loan

A lump-sum installment loan secured by your home, usually at a fixed rate. Sometimes called a second mortgage.

I

Installment loan

A loan for a set amount repaid in a fixed number of scheduled payments, such as most personal, auto and student loans. Once it is paid off, the account closes.

Interest rate

The percentage a lender charges on the balance you owe, before fees. On a fixed-rate installment loan it determines how much of each payment goes to interest. It is usually lower than the APR when the loan has fees.

L

Late fee

A charge for a payment received after the due date or after a grace period. The amount and timing are set in the loan agreement and may be limited by state law.

Loan term

How long you have to repay a loan, usually stated in months. A longer term lowers each payment and usually raises the total interest you pay.

Loan-matching service

A company that collects your loan request and passes it to lenders and partners in its network. It usually isn't the lender and doesn't set rates or terms.

Loan-to-value ratio (LTV)

The loan balance divided by the value of the collateral, as a percentage. Lenders use it to set terms on car loans, refinances and home equity borrowing.

M

Military Lending Act (MLA)

A federal law that caps the cost of most consumer credit for active-duty servicemembers and their dependents at a 36% military annual percentage rate and bans certain terms.

N

Negative equity

Owing more on a loan than the item securing it is worth, such as a car loan balance higher than the car's value. Also called being upside down.

NMLS

The Nationwide Multistate Licensing System, which many states use to license mortgage and consumer lenders. NMLS Consumer Access lets you look up a company's licenses.

O

Origination fee

A one-time fee some lenders charge to make a loan, usually a percentage of the amount. It may be taken out of the money you receive or added to the balance. Either way it raises the APR above the interest rate.

P

Payday alternative loan (PAL)

A small-dollar loan offered by some federal credit unions under National Credit Union Administration rules that cap the rate and application fee.

Payday loan

A small, short-term loan usually due on your next payday, with fees that commonly work out to an APR in the hundreds of percent. Rules vary widely by state.

Preapproval

A more thorough conditional review than prequalification, often with a hard credit check and some verification. Final approval can still depend on verifying your information and other conditions.

Prepayment penalty

A fee some lenders charge if you pay off a loan early. Many personal loans don't have one, but check the agreement before you sign.

Prequalification

A lender's early estimate of whether you might qualify and at what rate, often based on a soft credit check and the information you provide. It is not an approval or a guaranteed offer.

Prime rate

A benchmark rate banks use to price some loans, including many variable-rate products. It tends to move when the Federal Reserve changes its federal funds target.

Principal

The amount you borrow, or the part of the balance still owed, not counting interest. Each payment on an amortizing loan pays some interest and some principal.

R

Refinancing

Replacing an existing loan with a new one, usually to get a lower rate, a different term, or a different payment. Fees and a longer term can cancel out the savings.

Revolving credit

Credit you can borrow, repay and borrow again up to a limit, such as a credit card or a home equity line of credit. Payments change with the balance.

Rollover

Extending a short-term loan by paying a new fee instead of repaying the balance. Repeated rollovers can cost more than the original loan.

S

Secured loan

A loan backed by collateral, such as a car, savings account or home. If you don't repay, the lender can take the collateral. Secured loans often carry lower rates because the lender's risk is lower.

Soft inquiry

A credit check that doesn't affect credit scores, such as checking your own credit, many prequalification checks, and prescreened offers.

T

Title loan

A short-term loan secured by your car's title. If you can't repay, the lender can repossess the car. Costs are typically very high.

Total cost of borrowing

Everything you pay beyond the amount you actually receive: interest plus fees. On a disclosure it shows up as the finance charge.

U

Unsecured loan

A loan with no collateral behind it. The lender relies on your credit and income. Most personal loans and credit cards are unsecured.

V

Variable rate

An interest rate that can change over time, usually because it is tied to an index such as the prime rate plus a margin. Payments can rise or fall. Home equity lines of credit and most credit cards are variable.